Report
by the Comptroller
and Auditor General
HM Revenue & Customs
Gift Aid and reliefs on donations
HC 733 SESSION 2013-14 21 NOVEMBER 2013
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HM Revenue & Customs
Gift Aid and reliefs
on donations
Report by the Comptroller and Auditor General
Ordered by the House of Commons
to be printed on 20 November 2013
This report has been prepared under Section 6 of the
National Audit Act 1983 for presentation to the House of
Commons in accordance with Section 9 of the Act
Amyas Morse
Comptroller and Auditor General
National Audit Office
19 November 2013
HC 733 London: The Stationery Office £16.00
This study examines how HMRC monitors and evaluates the
effectiveness of reliefs on donations, and how it addresses
tax avoidance, fraud and error relating to these reliefs.
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Contents
Key facts 4
Summary 5
Part One
The costs and effectiveness of Gift Aid
and other reliefs on donations in meeting
their objectives 14
Part Two
HMRC’s response to abuse of
the reliefs 26
Appendix One
Our audit approach 42
Appendix Two
Our evidence base 44
Appendix Three
Assessment of Gift Aid and reliefs
on donations 46
The National Audit Office study team
consisted of:
Jonny Mood, Riaz Rahman,
Edward Heardman and Fergal Stamp,
under the direction of Rob Prideaux.
This report can be found on the
National Audit Office website at
www.nao.org.uk/2013-gift-aid
For further information about the
National Audit Office please contact:
National Audit Office
Press Office
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Tel: 020 7798 7400
Enquiries: www.nao.org.uk/contact-us
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4 Key facts Gift Aid and reliefs on donations
Key facts
£2bn
£217m £170m
cost to Exchequer of
tax reliefs on donations
provided to charities,
individuals and
companies in 2012-13
tax at risk from marketed
avoidance schemes
on claims dating from
2004 onwards
HMRC’s rough estimate
of tax lost through abuse
of the reliefs, 2012-13
Where the reliefs go
£1 billion
the value of Gift Aid relief HMRC paid to charities in 2012-13,
about 2 per cent of all charity income
£940 million
tax relief provided to individuals and businesses on their donations
to charity in 2012-13
HMRC’s administration of the reliefs
1,800
open avoidance cases relating to marketed schemes that use
the reliefs
£63 million
of loss HMRC prevented from examinations of the reliefs provided to
charities in 2012-13, up from £15 million in 2009‑10
£9.7 million
the cost of administering Gift Aid and other reliefs for charities, 2012‑13
£44
the amount of tax that HMRC’s charities team estimates that it
recovered for every £1 of direct spend on compliance work in 2012-13
Gift Aid and reliefs on donations Summary 5
Summary
The context for this report
1 The government collects taxes to fund public services, and help individuals,
households and businesses with targeted financial support. Government can use
the taxation system to redistribute wealth and influence behaviour. It must also keep
the tax system competitive to protect tax revenue and support economic growth.
2 All tax systems include tax reliefs, which are rules intended to reduce an
individual’s, charity’s or company’s tax liability. HM Treasury is responsible for strategic
oversight of the tax system. HM Treasury and HM Revenue & Customs (HMRC) work
together in a policy partnership on the development of tax policy, including the design
of tax reliefs. HMRC administers the tax system, and is responsible for the maintenance
of tax policy, providing advice on the design of tax rules and monitoring their application.
3 There is no official categorisation of different forms of tax relief, but in its published
statistics HMRC identifies relief on the income of charities as one of a subset of tax
reliefs it calls ‘tax expenditures’. Tax expenditures include a broad range of reliefs,
described by HMRC as reliefs “to help or encourage particular types of individuals,
activities or products. Such reliefs are often an alternative to public expenditure, and
have similar effects”. HMRC has incomplete data on the costs of these reliefs but
identifies 47 principal tax expenditures, which range in value from £50 million a year
for the smallest to £20 billion for the largest.
4 As government’s auditors we would reasonably expect to see evidence of an
effective system of controls to design, manage and evaluate the use of a tax expenditure
which is rigorous and proportionate, and would share many of the features that we
would expect for a spending programme. For example: an adequate evidence base is
available to support decisions over design of the relief or changes to it, including lessons
learnt from evaluations of other reliefs; there is clarity about how government intends to
monitor and assess the cost and impact of the relief and evaluate its outcomes; and,
adequate safeguards are in place to prevent excessive leakage through abuse and error.
6 Summary Gift Aid and reliefs on donations
5 This report examines whether the way Gift Aid and other reliefs on donations to
charity are administered by HMRC and evaluated by the exchequer departments meet
these criteria. We have examined Gift Aid and tax reliefs on donations in particular
following the Committee of Public Accounts’ (the Committee) concern about the
potential scale of abuse of reliefs on donations to charity. In June 2013, the Committee
concluded that the Cup Trust charity was part of a tax avoidance scheme which
put over £46 million of tax at risk through claims for Gift Aid relief.1 We are reporting
separately on the questions the Cup Trust raised about the Charity Commission’s
effectiveness as a regulator of charities.
How Gift Aid and reliefs on donations work
6 Successive governments have legislated to exclude charities from income tax,
including income from donations, since the first permanent Income Tax Act of 1842.
Gift Aid reflects this principle and is one of the largest tax reliefs available to charities.
It provides an important source of income to charities, representing around 2 per cent
of total charities’ income.
7 When individuals make a donation, the charity may ask them to complete a
Gift Aid declaration, authorising the charity to claim Gift Aid. The donor needs to be
a UK taxpayer and to have paid enough income tax or capital gains tax to cover the
amount the charity will reclaim on the donation. The charity claims a repayment from
HMRC of the basic rate tax that the donor is deemed to have paid on the sum donated.
If the donor is a higher or additional rate taxpayer, the donor can also claim relief on
the difference between their highest tax rate and the basic rate (Figure 1).
8 There are also reliefs available to individuals and companies when they donate
certain shares and other qualifying investments to a charity (hereafter referred to as
Gift of Shares and Securities) and to companies when they donate money. Charities
do not receive a repayment from HMRC on these donations; instead the reliefs reduce
the donor’s taxable income by the value of the donation. The four reliefs on donations
covered by our report are shown in Figure 2.
9 It is important that tax reliefs on donations are well administered to protect the
reputation of the charitable sector and give confidence to donors. In common with
many other tax reliefs, reliefs on donations are susceptible to abuse and error. HMRC
runs checks to manage losses from such abuse and to act as a deterrent. HMRC has
a dedicated charities team which is responsible for coordinating HMRC’s work on the
tax affairs of charities.
1
HC Committee of Public Accounts, Charity Commission: the Cup Trust and tax avoidance, Seventh Report
of Session 2013-14, HC 138, June 2013.
Gift Aid and reliefs on donations Summary 7
Figure 1
Gift Aid relief provides a repayment of tax to charities
Higher rate taxpayers can also receive a reduction in their tax liability
Donor
Charity
Gift Aid Relief
Individual makes a
donation to charity.
The donor makes
a Gift Aid declaration.
Individual donates
money to charity
Higher Rate Relief
If the individual is a higher
or additional rate payer they
can receive a reduction
in their tax liability on the
difference between their
highest rate of tax and the
basic rate.
HMRC
Charity receives the
donation. It applies to HMRC
to receive a repayment of
the basic rate tax deemed
to have been paid on
the donation, increasing the
total value of the donation to
the charity.
HMRC receives and
processes the claim.
HMRC pays the
charity Gift Aid relief
It makes a payment to
the charity of the basic
rate tax on the donation.
The taxpayer reduces
their tax liability by
paying tax only at
the basic rate on the
total amount of their
donation.
Donor receives a reduction in their tax liability
HMRC reduces the
donor’s tax liability.
Source: National Audit Office review of HM Revenue & Customs guidance
Figure 2
Main reliefs on donations to charity and recipients
Relief
Description
Recipient of relief
Example
Gift Aid relief
A gift of money to a charity from an
individual who pays UK tax. The charity
can reclaim the basic rate of tax paid
on the donation.
The charity
On a £100 donation the charity can
reclaim £25. The total value of the
donation to the charity is £125.
Higher Rate relief
Higher rate and additional rate
taxpayers can reclaim the difference
between their highest rate of tax and
the basic rate on donations made
under Gift Aid.
Higher rate taxpayers
On a £100 donation a higher rate
taxpayer can reclaim £25. An additional
rate taxpayer can reclaim £31.25.
Corporate Gift Aid
A gift of money to charity. Companies
can reduce their taxable income by the
amount donated.
Companies
A company donates £100 to charity
and reduces its taxable income by
the same amount.
Gift of Shares and
Securities
Individuals or companies donating
shares and securities can reduce their
taxable income by the value of the gift.
Mostly affluent
individuals and
companies
An individual donates £100 of shares
to charity and reduces their taxable
income by the same amount.
Source: HM Revenue & Customs guidance on giving to charities
8 Summary Gift Aid and reliefs on donations
10 The main risks of the reliefs being applied in a way Parliament did not intend are:
•
Fraud. Criminals may falsify donations to generate a repayment of Gift Aid relief.
They may set up a charity to facilitate the fraud, hijack the details of a charity, or
use a position of influence in an existing charity.
•
Avoidance activity. Companies and individuals may create ways to avoid tax
particular to their circumstances. Avoidance schemes may also be marketed
by promoters on the basis that they provide the scheme user with a potential tax
benefit that is greater than the true value of the donation. Other schemes operate
by extracting the value of the donations from the charity.
•
Error. For example, charities may mistakenly submit incorrect details or duplicate
claims or claim relief when the donor did not authorise Gift Aid. Individuals may
also sign a Gift Aid declaration when they have not paid enough tax for their
donation to qualify.
The scope of this report
11 This report examines:
•
the costs and effectiveness of Gift Aid and reliefs on donations in meeting their
objectives (Part One); and,
•
HMRC’s response to the abuse of the reliefs (Part Two).
Our audit approach and evidence base are summarised at Appendices One and Two.
Key findings
Objectives, costs and effectiveness
12 Gift Aid is an important source of income for charities, having largely
displaced other reliefs on donations paid to charities by HMRC. Charities identify
Gift Aid as an essential fundraising tool. As the value of Gift Aid payments has increased,
it has as intended largely displaced other forms of relief, such as that previously
available on covenants. In real terms, the amount paid to charities in respect of reliefs on
donations increased between 1990 and 1999 but fell following changes made to Gift Aid
in April 2000 which extended the range of the reliefs and redirected some relief from the
charity to the donor. The amounts paid to charities have since risen to over £1 billion a
year, similar in real terms to their value in the late 1990s before these changes took effect
(paragraphs 1.4 to 1.10).
Gift Aid and reliefs on donations Summary 9
13 The government has multiple objectives for reliefs on donations. Tax relief
on donations reflects a long-held principle, consistently accepted by Parliament, that
charitable income should be exempt from taxation where that income is used for
charitable purposes. Gift Aid and other reliefs on donations are current mechanisms for
achieving this. They encompass a wider set of objectives, such as making the taxation
system simpler for charities and donors to use and encouraging more giving by making
donations more tax efficient (paragraphs 1.4 to 1.6).
14 Since Gift Aid was reformed in 2000, there has been a significant increase in
the costs of reliefs claimed by donors, but HMRC does not know if the changes
have met the objective to encourage more charitable giving. Adjusted for inflation,
charities received £1,060 million in tax relief on donations in 1999-2000, and donors
received £130 million; in 2012-13, charities received £1,040 million, and donors around
£940 million. The changes in 2000 broadened access to tax efficient giving and made
the tax system simpler for charities and donors to use, supporting the broad principle of
exempting charitable income from taxation. When the changes were made, however, the
exchequer departments did not establish a framework, or set out to collect data, by which
they could have evaluated their wider effects. HMRC has since undertaken research on
the impact of the changes, but the evidence they had collected was not robust enough to
provide assurance that the incentives have met the objective to encourage more people
to give more to charity. Research from the charitable sector is inconclusive about how
patterns of giving have changed, but there is no evidence of a causal link between the
changes to the reliefs and the value of donations (paragraphs 1.11 to 1.17).
15 Government has not set out what good performance would be. The broad
objectives of the reliefs to widen access and simplify the tax system could be met even
if HMRC’s performance in administering them was poor. For example, though it has
commissioned research to understand the barriers to take-up, HMRC has not identified
what level of take-up of Gift Aid should be achievable. A rise in the uptake of Gift Aid
among donors by ten percentage points could result in charities receiving an additional
£94 million in relief. This would involve changing the behaviour of some 2.5 million donors
(paragraphs 1.4 to 1.6 and 1.18 to 1.19).
16 HMRC does not have an accurate estimate of how much tax is lost through
avoidance, fraud and error in respect of reliefs on donations. HMRC has produced
a working estimate that £170 million was lost in 2012-13 based on its analysis of tax
loss in related areas. However, it recognises that its methodology is crude and may
understate the level of loss. For example, donors need to have paid tax in order for
charities to reclaim payments of Gift Aid. Our analysis suggests that HMRC may be
paying a further £55 million in error where the donor has paid insufficient tax to allow the
charity to claim Gift Aid. HMRC plans to undertake a full analysis of the losses in respect
of reliefs on donations in autumn 2013 (paragraphs 1.24 to 1.25).
10 Summary Gift Aid and reliefs on donations
HMRC’s response to abuse of the reliefs
17 HMRC faces a serious compliance challenge in respect of reliefs on
donations, in particular from avoidance. Our analysis of HMRC’s estimate of losses
in 2012-13, shows that the largest losses occurred through avoidance activities such as,
for example, the misuse of Higher Rate relief (Figure 3 and paragraphs 1.24 to 1.25).
Figure 3
Estimate of losses in 2012-13
Avoidance accounts for the largest losses from tax reliefs on charitable donations
£ million
120
100
110
80
60
40
45
20
15
0
Avoidance
Error
Fraud
Note
1 The figures are after any activities HMRC has taken to reduce losses. The figures exclude tax at risk through
marketed avoidance schemes as HMRC does not expect any of these claims to succeed. HMRC does not
categorise its losses as ‘avoidance’, ‘error’ or ‘fraud’. The split is based on National Audit Office analysis of
the recorded figures.
Source: National Audit Office analysis of HM Revenue & Customs data
18 Significant sums are at risk from marketed avoidance schemes, though
HMRC is confident it can counter this threat. HMRC has identified eight marketed
avoidance schemes that fall into three broad categories, estimating that they put
£240 million of tax at risk. Following its investigations, 200 users have since withdrawn
claims to the value of £23 million. There remain 1,800 open cases, representing
approximately 5 per cent of all avoidance cases HMRC is investigating across the tax
system and about 2 per cent of the value. HMRC is challenging these claims and does
not expect any to succeed when heard at tribunal so therefore does not estimate any
tax loss will result from the claims (paragraphs 2.9 and 2.40).
Gift Aid and reliefs on donations Summary 11
19 It is more difficult for HMRC to detect and counter the avoidance activities
of individuals or companies that do not rely on marketed schemes. Those
charities that are used as vehicles for tax avoidance are generally unfamiliar to most
people and do not receive donations from the general public. While a very small
proportion of charities are set up to abuse charitable status, the cumulative costs
of small‑scale avoidance activity are large, accounting for £110 million of tax lost
in 2012‑13 (paragraphs 2.7 to 2.8 and 2.33).
20 HMRC estimates that compliance work by its charities team prevented the
loss of £63 million of tax at risk from the abuse of reliefs on donations in 2012‑13,
a four-fold increase since 2009-10. Before 2009, HMRC’s emphasis had been on
quickly processing Gift Aid claims so that charities received the repayments quickly,
and few security checks were undertaken. Recognising the risks that this posed, it
introduced a new strategy in 2009 to tackle fraud, strengthened its manual checks on
repayments, and introduced controls to reduce mistakes and better identify fraudulent
claims (paragraphs 2.24 to 2.27 and 2.44).
21 In 2012-13, HMRC prevented £44 of tax loss for every £1 spent on staff
checking Gift Aid claims and charities’ tax affairs for compliance, but does not
know if it has the optimal level of resourcing. A doubling of compliance staff since
2009-10 has increased this ratio from 21:1 to 44:1, which compares favourably with
HMRC’s rule of thumb that investment in compliance work should provide a marginal
return of around 11:1. HMRC’s charities team is considering revisions to its staffing
model to increase the impact of its work (paragraph 2.45 to 2.48).
22 Acting on HMRC’s advice, the government has made changes to tax law
which have helped to prevent the abuse of reliefs. HMRC recommended changes,
which government introduced, to stop the exploitation of reliefs on donations following
the identification of specific tax avoidance schemes in 2004 and 2009. It believes these
changes have prevented additional people from using the schemes while deterring
attempts to establish new schemes. Government introduced legislation in 2010 to allow
HMRC to apply a ‘fit and proper persons’ test to the managers of charities, giving it the
power to refuse claims for tax reliefs and exemptions from existing charities. On each of
the around 200 occasions it has raised questions in relation to this test, the application
has been withdrawn (paragraphs 2.14 to 2.15 and 2.31 to 2.32).
12 Summary Gift Aid and reliefs on donations
23 HMRC does not combine all the information it holds about the operation of
reliefs on donations, and so lacks a complete picture of the nature of the risks and
the cost and impact of its interventions to counter them. While the HMRC’s charities
team is responsible for the risks relating to the tax affairs of charities and processes Gift
Aid claims, claims for relief on donations by individuals and businesses are processed
by other parts of HMRC’s business. The charities team does not have oversight of these
checks and other teams in HMRC are not required to pass on information about relevant
investigations or the impact or cost of their interventions. HMRC’s information on the
losses it has stopped is therefore incomplete. In 2012-13, it identified that it had stopped
£15 million in fraudulent Gift Aid claims by charities and £31 million on claims by charities
containing or made in error. However, it did not collect data on how much avoidance or
error it stopped relating to individuals claiming Higher Rate relief or companies claiming
Corporate Gift Aid (paragraphs 1.21, 2.16 to 2.19 and 2.44 to 2.46).
24 There remain gaps in HMRC’s knowledge about its charity customers that
prevent it from tailoring its interventions most effectively. HMRC does not currently
hold important information about charities claiming tax reliefs, including details of their
activities, income, expenditure and assets, and has not maximised its potential to learn
more by sharing information with the charity regulators, such as the Charity Commission
for England and Wales. HMRC currently requires around 10 per cent of charities that
have made recent Gift Aid claims to make a tax return, and intends to increase the
number of charities it asks for this information to improve its profiling of customers and
assessments of risk. This will allow HMRC to better target those claims which present
a risk (paragraphs 2.34 to 2.37).
Conclusion on value for money
25 Gift Aid provides an important source of income for many charities and reflects
Parliament’s intention that the income of charities should not be taxed where it is used
for charitable purposes. There is welcome evidence that HMRC has strengthened its
measures to counter the risk of the abuse of reliefs on donations. However, there is
insufficient evidence to conclude that reliefs on donations in their current form, and the
way they are implemented, provide value for money.
26 First, there is insufficient evidence that government actively encourages take-up
of these reliefs so that those charities which are entitled to them receive the intended
benefits. Second, the effectiveness of changes made in 2000 to increase charitable
giving is not proven. HMRC’s research on the impact of the changes does not allow
a clear conclusion to be drawn, and there is an absence of evidence that would
demonstrate that the increased cost to the exchequer has resulted in an increase in
the value of donations to charity.
Gift Aid and reliefs on donations Summary 13
Recommendations
a
HMRC and HM Treasury should collect better evidence on the impact of
reliefs on donor behaviour, working with the charitable sector and academics
to obtain this. The evidence so far collected has not been sufficient to conclude
on whether the incentives provided to donors are working as intended, or whether
Gift Aid makes the tax system sufficiently easy for charities to claim the relief.
Greater joint working with the charitable sector on data collection and analysis
could provider a richer evidence base from which to assess the impact of reliefs.
b
When changes are made to the rules governing tax expenditures, HM Treasury
and HMRC should consider what evidence will be required for evaluation
and put in place mechanisms to collect it. HMRC should consider what is
proportionate and feasible for it to collect in order to assess whether the stated
objectives are being met; to inform potential changes that might improve the relief’s
effectiveness; and to provide an evidence base to inform the design of other reliefs.
c
HMRC should undertake regular assessments of the losses from Gift Aid and
reliefs on donations. HMRC plans to undertake a full assessment of the losses for
charity tax reliefs in autumn 2013. HMRC should assess the costs of undertaking
this assessment against the benefits of the information it provides and should
consider how best to update the estimate in future.
d
HMRC should evaluate ways to reduce losses from avoidance. HMRC has
successfully increased the impact of its interventions, but more focus is required
on tackling avoidance.
e
HMRC should ensure there are better internal flows of information to its
charities team. The team with overall responsibility for charities should establish
formal agreements with other parts of the business to ensure full information
and data sharing. This should include providing better management information
on yields.
f
HMRC needs to better understand its customers in the charitable sector in
order to improve its ability to identify risk. HMRC is planning to obtain more
information on its customers. HMRC should develop more detailed customer
profiles to help it assess which charities, individuals or companies require review.
g
HMRC should work more closely with the Charity Commission and other
regulators of charities to identify and resolve potential problems with the tax
affairs and running of charities. They need to share information more effectively
and collaborate on the risk profiling of charities. To do so they will need a better mutual
understanding of the organisations’ information requirements and ways of working.
14 Part One Gift Aid and reliefs on donations
Part One
The costs and effectiveness of Gift Aid and other
reliefs on donations in meeting their objectives
An overview of tax reliefs
1.1 All tax systems include tax reliefs, which are rules intended to reduce an
individual’s, charity’s or company’s tax liability. HM Treasury is responsible for strategic
oversight of the tax system. HM Treasury and HM Revenue & Customs (HMRC) work
together in a policy partnership on the development of tax policy, including the design
of tax reliefs. HMRC administers the tax system, and is responsible for the maintenance
of tax policy, providing advice on the design of tax rules and monitoring their application.
1.2 There is no official categorisation of different forms of tax relief, but in its published
statistics HMRC identifies relief on the income of charities as one of a subset of tax
reliefs it calls ‘tax expenditures’.2 Tax expenditures include a broad range of reliefs,
described by HMRC as reliefs “to help or encourage particular types of individuals,
activities or products. Such reliefs are often an alternative to public expenditure, and
have similar effects”. HMRC has incomplete data on the costs of these reliefs but
identifies 47 principal tax expenditures, which range in value from £50 million a year
for the smallest to £20 billion for the largest.
1.3 As government’s auditors we would reasonably expect to see evidence of
an effective system of controls to design, manage and evaluate the use of a tax
expenditure, which is rigorous and proportionate, and would share many of the
features as we would expect for a spending programme. For example: an adequate
evidence base is available to support decisions over design of the relief or changes to
it, including lessons learnt from evaluations of other reliefs; there is clarity about how
government intends to monitor and assess the cost and impact of the relief and evaluate
its outcomes; and, adequate safeguards are in place to prevent excessive leakage
through abuse and error (Figure 4). We outline our assessment of Gift Aid and reliefs on
donations against these criteria in Appendix Three.
2
HMRC describes this further in HM Revenue & Customs, Tax Expenditures and Ready Reckoners.
Available at: www.hmrc.gov.uk/statistics/expenditures/introduction.pdf, accessed 23 October 2013.
Gift Aid and reliefs on donations Part One 15
Figure 4
Characteristics of a well-designed, administered and evaluated
tax expenditure
HM Treasury provides guidance for appraisal and evaluation
Design
There is an adequate evidence base
available to support decisions over design
The objectives and intended outcomes
are clear
An impact assessment and option
appraisal was undertaken
Evaluation and feedback
Administration and monitoring
A process for evaluation of the costs
and benefits of the tax expenditure
has been identified and is undertaken
The costs and benefits are
monitored and assessed
Feedback from evaluation informs
changes and the knowledge base for
design of future tax expenditures
Process for delivering the relief
is managed
The risks are assessed
and mitigated
Source: National Audit Office summary of HM Treasury, The Green Book, appraisal and evaluation in Central Government,
July 2011, and HM Treasury, Magenta Book, guidance for evaluation, April 2011
The objectives of Gift Aid and reliefs on donations to charity
1.4 Successive governments have legislated to exclude charities from income tax,
including income from donations where the income is used for charitable purposes, since
the first permanent Income Tax Act of 1842. Gift Aid reflects this approach and allows
charities to claim the basic rate tax that donors have paid on their donations. Tax reliefs on
donations have a wider set of objectives, which have evolved over time as rules on eligible
donations were changed and reliefs which can be claimed by individuals and companies
on their donations were introduced and amended. These wider objectives include making
the tax system simpler for charities and donors to use, and encouraging more giving by
individuals and companies. The objectives of the main Gift Aid scheme were most recently
stated in a consultation on Digital Giving in July 2013 (Figure 5 overleaf).
16 Part One Gift Aid and reliefs on donations
Figure 5
Government statements on the purpose of Gift Aid and reliefs
on donations
Year and source
Government statement
1990
Chancellor’s budget statement
“I propose a Gift Aid scheme that will, for the first time,
give tax relief for large money donations. …I do not
wish to undermine regular giving through the payroll
scheme and covenants, which are very important
to some charities. Therefore, this scheme applies to
larger donations.”
1999
Pre-budget statement which announced
the intention to make Gift Aid available
for donations of any size and to introduce
Gift of Shares and Securities and
Corporate Gift Aid
Changes introduced from April 2000 in charity taxation
“to encourage more individuals and businesses to give
more, and to make the taxation system simpler for
donors and charities to use.”
2007
Consultation on Gift Aid
Gift Aid is a tax relief that was introduced in 1990 to
encourage gifts of money to charities.
2013
Consultation on Digital Giving
The government wants to encourage more people
to donate by increasing the value of their gift, and to
maximise the possible income to charity from each
donation they receive. The government therefore wants
Gift Aid to be claimed on as many donations as possible.
Source: National Audit Office analysis
1.5 The government introduced the first Gift Aid scheme in 1990, initially to support
one-off donations to charities with only large donations qualifying. This scheme was
designed to operate alongside existing reliefs available to charities, such as donations
through covenants, which was the main mechanism to provide tax relief to charities on
the donations they received.
1.6 In 2000, the government made several changes intended to broaden access to
tax reliefs on donations, simplify the tax system for charities and donors, and encourage
more donations to charity. These changes left in place a range of tax reliefs to replace
those that had been available through deeds of covenant. Separate reliefs on donations
for Gift of Shares and Securities were introduced and Corporate Gift Aid was reformed;
the donor rather than the charity receives the relief on these donations. Prior to 2000,
charities could claim relief on donations from companies, and the change ended this
particular relief for charities. Figure 6 shows how Corporate Gift Aid and Reliefs on
Shares and Securities work. Tax reliefs on donations allow donors to donate greater
amounts to charity at the same net cost, or to donate the same amount more cheaply.
Gift Aid and reliefs on donations Part One 17
Figure 6
Reliefs on Gift of Shares and Securities and Corporate Gift Aid are designed to reduce
the cost of giving for individuals and companies
Charity
Donor
Gift of Shares and
Securities
Individual or company
donates £100 of shares or
securities to charity.
Donor can reduce their
taxable income by the full
value of the donation.
The charity receives shares or
securities worth £100.
Donor donates
£100 of shares
The company can reduce
its tax liability by the full
value of the donation.
The individual or company
records the value of the
donation on their tax return.
HMRC reduces the donor’s
tax liability.
The donation reduces the donor’s tax liability. A £100 donation by
an individual effectively costs them £60 as a higher rate taxpayer,
or £55 if they are an additional rate taxpayer.
The charity receives a donation
of £100.
Corporate Gift Aid
A company donates £100
to a charity.
HMRC
Company
donates £100
The company records the
value of the donation on
their corporate tax return.
HMRC reduces the
company’s tax liability.
The donation reduces the company’s tax liability. If the company
pays tax at 20 per cent the £100 donation effectively costs it £80.
Source: National Audit Office review of HM Revenue & Customs guidance
Cost and effectiveness of the reliefs
1.7 The government spends substantial amounts of money through tax reliefs on
donations. HMRC paid around £1 billion in Gift Aid relief to charities in 2012-13, while
individuals through Higher Rate relief on Gift Aid donations claimed £470 million of relief.
Individuals reduced their tax liabilities by a further £70 million through Gift of Shares and
Securities relief. HMRC’s rough estimate of the cost of Corporate Gift Aid was around
£400 million. Figure 7 overleaf shows how the cost of tax reliefs has increased over
time. This excludes the cost of Corporate Gift Aid after 2000 as HMRC does not hold
time series data after this point.
The impact of the reliefs on charities’ income
1.8 Since Gift Aid was introduced the total value of donations where Gift Aid is applied
has steadily increased. The value of Gift Aid relief for charities has increased from around
£290 million a year in 2000-01 to over £1 billion in 2012-13. This accounts for around
2 per cent of all charity income.
18 Part One Gift Aid and reliefs on donations
Figure 7
The total cost of tax reliefs in real terms has increased since the introduction of
Gift Aid in 1990
Repayments of tax to charities and tax reliefs provided to individuals, 1990-91 to 2012-13
£ million
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
5
8
6
3
1
9
6
4
2
9
7
4
2
0
7
5
3
2
1
8
3
1
0
-9 1-9 2-9 3-9 4-9 5-9 6-9 7-9 8-9 9-0 0-0 1-0 2-0 3-0 4-0 5-0 6-0 7-0 8-0 9-1 0-1 1-1 2-1
9
9
0
9
0
0
9
0
1
9
0
9
0
0
9
0
1
9
0
0
1
9
19
19
20
19
20
20
19
20
20
19
20
19
20
20
19
20
20
19
20
20
20
19
90
19
Notes
1 Figures are adjusted for inflation to 2012-13.
2
Data includes tax repayments to charities, Higher Rate relief to individuals, and Gift of Shares and Securities relief to individuals. HMRC does not hold time
series data on the value of Corporate Gift Aid after 1999-2000, following changes to this relief in 2000.
3
Reliefs on Gift Aid and Gift of Shares were introduced in 1990 and 2000 respectively.
Source: National Audit Office analysis of HM Revenue & Customs UK Charity Tax Relief Statistics available at: www.hmrc.gov.uk/statistics/charity.htm,
accessed 23 October 2013
1.9 HMRC has made repayments of tax to charities primarily through Gift Aid relief
since government expanded that relief in 2000. Previously, charities received other types
of tax repayments, as shown in Figure 8. These included deeds of covenant which
provided tax relief for regular, fixed donations to charity over a period of at least three
years. Gift Aid replaced covenants as a more flexible and accessible relief for donors.
The total value of reliefs on donations paid to charities has fluctuated over time. In real
terms, the amount paid to charities in respect of reliefs on donations increased between
1990 and 1999 but fell following changes made to Gift Aid and reliefs on donations in
2000. They have since risen to over £1 billion a year, similar in real terms to their value
in the late 1990s before these changes took effect. Prior to 2000, tax repayments to
charity included Gift Aid from donations made by companies. The changes made
in 2000 redirected this relief to the donor, and so this component of the reliefs is not
included in the data – which shows only the tax repaid to charities – after 1999-2000.
The trading subsidiaries of charities that donate their profits as a Corporate Gift Aid
donation will make use of this relief, although HMRC does not have a reliable estimate
of the value of this benefit for the period since 2000.
Gift Aid and reliefs on donations Part One 19
Figure 8
Tax repayments on donations to charities over time have fluctuated
The value of Gift Aid repayments from donations by individuals has increased
£ million
1,200
1,000
800
600
400
200
0
5
3
9
8
1
7
6
2
1
0
6
4
0
9
4
2
8
7
3
2
1
5
3
-0
-9 1-9 2-9 3-9 4-9 5-9 6-9 7-9 8-9 9-0 0-0 1-0 2-0 3-0 4-0 5-0
-0
-1
-1
-0
-1
-1
9
9
9
06 007 008 009 010 011 012
9
0
9
0
9
9
0
9
9
0
0
0
19
19
2
19
20
19
2
20
19
20
19
2
19
20
19
2
19
2
20
2
20
20
90
19
Total tax repayments to charities
Gift Aid repayments from donations by companies
Gift Aid repayments from donations by individuals
Notes
1 Figures are adjusted for inflation to 2012-13 prices.
2
Following Budget 2000, company donations are paid gross and do not involve tax repayments and hence are excluded.
Source: National Audit Office analysis of HM Revenue & Customs UK Charity Tax Relief Statistics available at: www.hmrc.gov.uk/statistics/charity.htm,
accessed 23 October 2013
1.10 Stakeholders we spoke to said that donors respond positively to Gift Aid reliefs
paid to charity as it allows donors to increase the value of donations to the charity at no
additional cost to themselves. Stakeholders identified this as an essential fundraising tool.
HMRC’s monitoring of the reliefs
1.11 There is no clear framework that sets out how HMRC and HM Treasury should
evaluate significant changes to reliefs, such as the changes in 2000. When introducing
reliefs or making changes to those that exist, they need adequate data and information
to evaluate changes and understand their costs and benefits. In 2000, there was a
commitment from the exchequer that “the impact of the new measures, and in particular
the administrative costs for charities, will be fully monitored and evaluated once they are
up and running.” 3
3
Inland Revenue, Final regulatory impact assessment: Getting Britain giving in the 21st Century, 2000, available online at:
www.hmrc.gov.uk/ria/ria_giving.pdf. Accessed 14 November 2013.
20 Part One Gift Aid and reliefs on donations
Reliefs provided to individuals and companies on their donations
1.12 In total, Gift Aid and reliefs on donations cost £2 billion in 2012-13, of which around
half went to individuals and companies. The value of tax reliefs provided to individuals
has increased since the changes made in 2000, which aimed to encourage more giving
to charity by broadening access to tax reliefs on donations (Figure 9). HMRC does not
record the trends for Corporate Gift Aid since 2000. Until recently companies did not
have to report this figure separately in their corporation tax return and as a consequence
HMRC has incomplete cost data for this relief. HMRC’s internal estimate is that in
2012‑13 Corporate Gift Aid cost around £400 million. In 1999-2000, prior to the changes,
the cost of providing reliefs to donors was around £130 million. In 2012‑13, it had risen in
total to around £940 million. The amount of relief paid to charities was £1,060 million in
1999‑2000 prior to the changes, and £1,040 million in 2012-13 (Figure 8).
Figure 9
Tax reliefs to individuals
The value of tax reliefs provided to individuals on their donations and gifts has steadily increased
£ million
600
500
400
300
200
100
0
1
2
3
4
5
6
7
8
1
9
2
3
4
5
-9 1-9 2-9 3-9 4-9 5-9 6-9 7-9 8-9 9-00 0-0 1-0 2-0 3-0 4-0 5-06 6-07 7-08 8-09 9-10 0-11 1-12 2-13
9
9
9
9
9
9
9
0
9
0
0
0
0
0
0
0
0
0
1
1
1
9
19
19
19
19
19
19
19
20
19
20
20
20
20
20
20
20
20
20
20
20
20
19
90
19
Gift of Shares and Securities
Higher rate relief
Note
1 Figures are adjusted for inflation to 2012-13.
Source: National Audit Office analysis of HM Revenue & Customs UK Charity Tax Relief Statistics available at: www.hmrc.gov.uk/statistics/charity.htm,
accessed 23 October 2013
Gift Aid and reliefs on donations Part One 21
1.13 HMRC told us that they identified that tax administration data would not allow them
to make a full assessment of changes to the design of the reliefs. Many donations do
not have a tax consequence and HMRC and HM Treasury do not hold data on the total
value and volume of donations over time. Third-party surveys on charitable donations
provide some of this information, but they do not cover the whole period in which Gift
Aid has operated.
1.14 In 2005 HMRC undertook an internal evaluation of the changes made in 2000,
based on commissioned research and its own evaluation of administrative data.
The evaluation found that the data HMRC collected were not robust enough to
allow conclusions to be drawn about whether the reliefs provided to donors were an
effective instrument through which to increase the value of donations. It found evidence
to suggest that changes relating to companies may have had a negative effect on
charities incomes and companies did not alter their donations in response to the
changes in tax relief. HMRC identified at this time that it did not have data on which it
could conclude a full evaluation.
1.15 In its 2005 evaluation HMRC set out ways to improve its evidence base and data
sources, which it recognised as weak. For example, it was suggested that a data
warehouse for charities data be established with the charitable sector, and that they
could make greater use of existing national surveys.
1.16 HMRC has developed its evidence base by commissioning additional research
and undertaking new analysis of internal data. The commissioned research includes
examination of charitable giving and the likely effects on donations to charities of possible
changes to Higher Rate relief. The scope of this work did not include the full range of areas
a complete evaluation would address. It indicated that increasing the up front tax relief
that charities can reclaim directly is a more effective way of increasing the total amount of
money going to charity than changing the Higher Rate relief.
1.17 The changes made in 2000 reflect the general principle that charities’ income
that is used for charitable purpose is not taxed, by broadening access to tax reliefs on
donations, including access to Higher Rate relief. Increased repayment of Gift Aid to
charities suggests it has broadened access to the relief, as donors have found it easier
to use than deeds of covenant. However, HMRC does not have sufficient evidence to
conclude that the broader objective of encouraging more people to give more to charity
has been achieved and that the reliefs provided to individuals and companies are
effective at increasing the total value of donations to charities. Data and research from
the charitable sector does not identify a significant change in trends in giving over this
period in terms of the proportion of people who give and the amount they give. There
is data that shows the total amount of donations from individuals has increased since
2000, but this might be explained by demographic and population changes rather than
changes in patterns of giving. There is no evidence of a causal link between the changes
to the reliefs and the value of donations.
22 Part One Gift Aid and reliefs on donations
Uptake of Gift Aid by charities and donors
1.18 HMRC recognises that the uptake of Gift Aid paid to charities could be higher,
although it has not assessed what level of uptake is achievable. Our analysis of data on
charitable giving in 2012 shows there are donations of around £2.3 billion where Gift Aid
is not used. Not all of these donations will be eligible for Gift Aid purposes, for example
if the donor does not pay tax, while some donors may not want HMRC to give this tax
revenue to charity.
1.19 The use of Gift Aid by donors increases as the value of donations rise. The uptake
of Gift Aid is highest where donations are greater than £100, although 94 per cent of
donations are for less than this. We estimate that if the use of Gift Aid was increased
among donors who give less than £100 by ten percentage points it could result in
charities receiving an additional £94 million in relief, as shown in Figure 10. Based on our
analysis, this would involve influencing the way in which around 2.5 million donors give.
1.20 HMRC has undertaken analysis to improve its understanding of the distribution of
Gift Aid payments across charities. HMRC analysed payments to charities by the type
of charitable causes they support using its internal data and that from charity regulators.
This analysis suggested that in 2009-10 around 30 per cent of Gift Aid was received by
charities carrying out religious activities and around 15 per cent by those carrying out
education or training. The remainder was split across 12 other categories of charitable
causes. HMRC’s intention is that this analysis will aid future work looking at distributional
impacts of Gift Aid.
Figure 10
The uptake of Gift Aid increases with size of donations
Increasing the uptake of Gift Aid relief by ten percentage points could result in an additional
£94 million for charities
Percentage of
donors
Value as
percentage of
all donations
Percentage of
donors who
use Gift Aid
(%)
(%)
(%)
NAO analysis of the
increase in Gift Aid
relief if use rose by
10 percentage points
(£m)
£10 or less
41
6
19
9
£10 – £25
31
16
43
25
£25 – £100
23
38
62
59
Over £100
6
40
80
–
100
100
Value of donation
Total
94
Note
1 We assume that uptake of Gift Aid on donations over £100 is close to the maximum uptake. Figures on total increase
do not sum to £94 million due to rounding. Data in this table is sourced from UK Giving 2012, except for the final
column which is the National Audit Office’s analysis.
Source: Office for National Statistics survey data; National Council for Voluntary Organisations and Charities Aid Foundation,
UK Giving 2012. An overview of charitable giving in the UK, 2011/12, November 2012. Available at: www.cafonline.org/PDF/
UKGiving2012Full.pdf, accessed 23 October 2013
Gift Aid and reliefs on donations Part One 23
1.21 HM Treasury and HMRC have also undertaken research to understand barriers to
the take-up of Gift Aid by charities and regularly consults with the charity sector. In 2013,
HM Treasury consulted on proposals to make it easier to claim Gift Aid on donations made
through digital channels. As part of this consultation HM Treasury asked for responses
on what barriers to take-up of Gift Aid charities experience. HMRC and HM Treasury also
hold regular meetings with stakeholders through HMRC’s Charity Tax Forum.
1.22HM Treasury and HMRC’s engagement with the sector has informed decisions
around changes to the administration of Gift Aid for charities. In 2013, HMRC launched
the Gift Aid Small Donations Scheme to provide additional payments where Gift Aid is
unclaimed. The scheme allows eligible charities to claim top-up payments on small cash
donations where charities may find it difficult to collect a Gift Aid declaration, such as
donations through charity bucket collections. For most eligible charities this could allow
them to claim a top-up payment of up to £1,250 a year. HMRC estimates it will distribute
£45 million in 2012-13 through this scheme, rising to £100 million by 2017-18.
Additional costs of the reliefs
1.23Government wants tax reliefs to achieve particular outcomes, but individuals and
organisations may use them in ways that Parliament did not intend. HMRC is responsible
for identifying areas of potential misuse. This section considers the costs of:
•
losses through avoidance, fraud and error; and
•
administering the reliefs.
Losses through avoidance, fraud and error
1.24HMRC has established a working estimate of the losses for reliefs on donations.
This is a separate exercise to HMRC’s annual estimate of the overall tax gap, and is used
to inform decisions about resource allocation. We have analysed HMRC’s data, which
indicates losses were £170 million in 2012-13, as shown in Figure 11 overleaf. It intends
to begin work on a full assessment of the losses across the reliefs covered in this report
in autumn 2013.
1.25As this is a working estimate, there are areas of potential loss which HMRC has yet
to fully analyse and there are indications that the initial estimate is an underestimate. For
example, we analysed survey data held by the Office for National Statistics on donors
and donations. We identified what individuals said they donated, whether they said they
used Gift Aid, and whether they were likely to have paid tax, given their reported income.
Allowing for potential misreporting, we estimate that HMRC may pay at least £55 million
a year to charities where donors have paid insufficient tax.
24 Part One Gift Aid and reliefs on donations
Figure 11
Estimated losses by category of risk, 2012-13
The tax losses are largest in the area of avoidance
£ million
120
100
80
60
40
20
0
Avoidance
Error
Fraud
Total
Net tax loss (£m)
Percentage of tax loss (%)
110
45
15
170
65
26
9
100
Notes
1 The figures are after any activities HMRC has taken to reduce losses. The figures exclude tax at risk through
marketed avoidance schemes as HMRC does not expect any of these claims to succeed. The analysis excludes
reliefs such as business rates and VAT.
2
HMRC does not categorise its losses as ‘avoidance’, ‘error’ or ‘fraud’. The split is based on National Audit Office
analysis of the recorded figures.
Source: National Audit Office analysis of HM Revenue & Customs estimate
Tax at risk due to marketed avoidance schemes
1.26Individuals or companies buy marketed tax avoidance schemes in the hope
of benefiting from the tax advantage the scheme offers. The schemes often involve
complex and contrived transactions.
1.27HMRC has identified tax at risk totalling £240 million through marketed avoidance
schemes that use reliefs on donations. This is the total tax revenue HMRC assesses
might be lost should it not be successful in challenging what it considers to be
avoidance activity related to marketed schemes. This figure has fallen as users, in part
prompted by HMRC’s investigations, have withdrawn 200 claims with a total value of
£23 million. The tax at risk relates to ongoing investigations dating back to 2004.
Gift Aid and reliefs on donations Part One 25
Costs of administering the reliefs
1.28HMRC’s charities team, within its specialist personal tax directorate, is responsible
for risks relating to the tax affairs of charities and managing HMRC’s relationship with
charity customers and the charity sector. The cost of administering Gift Aid relief has
increased as HMRC has shifted its focus from processing claims as quickly as possible
to tackling the risk of abuse. The cost of HMRC’s charities team in 2012-13 was
£9.7 million, an increase of 23 per cent since 2008-09. Staff numbers increased from
130 in 2009 to 185 in 2013. HMRC does not record separately the cost of processing
the claims made by individuals or companies as part of their annual tax return.
1.29Charities also incur a cost in administering their claims for Gift Aid relief, although
no reliable estimate has been made by either the charitable sector or HMRC. Research
conducted for HMRC and Charities Aid Foundation in 2008 reported that charities
did not find claiming Gift Aid a simple process, but that Gift Aid was not the largest or
hardest of their administrative duties. In 2013, HMRC launched Charities Online, which
allows for quicker payments to charities of their Gift Aid claims and aims to reduce the
administrative burden for charities.
26 Part Two Gift Aid and reliefs on donations
Part Two
HMRC’s response to abuse of the reliefs
2.1 This part examines:
•
how reliefs on donations are abused;
•
HMRC’s response to these risks; and
•
the outcomes HMRC achieves.
How reliefs on donations are abused
2.2 The reliefs provided by government are valuable to charities, but this has also made
them attractive to fraudsters and tax avoiders, who have found a range of ways in which
to exploit them. This creates a challenge to HMRC in detecting and preventing abuse.
Those charities abusing their charitable status are largely unknown to the general public
and do not receive public donations. While only a small number of charities are set up in
order to abuse tax reliefs, the costs to HMRC of this abuse can be large.
2.3 This section examines how abuse may take place through fraud, avoidance and error.
Fraud
2.4 HMRC estimates that £15 million was lost through fraudulent claims in 2012-13.
Fraudsters have targeted Gift Aid relief paid to charities. Unlike other reliefs on donations,
Gift Aid claims from charities generate a cash repayment rather than reducing a
claimant’s tax liability.
2.5 HMRC have identified a number of ways in which fraudsters may operate. They
may set up charities to facilitate fraud or hijack the details of a charity. They may then
falsify donations in order to try and generate a repayment of Gift Aid relief. Fraudsters
have also attempted to change the bank details of genuine charities held by HMRC by
claiming to represent the charity. This would allow them to redirect payments of Gift Aid
to a bank account they control.
2.6 There have also been cases of fraud being committed by individuals or companies
abusing a position of influence they hold in an existing charity.
Gift Aid and reliefs on donations Part Two 27
Avoidance
2.7 HMRC estimates that £110 million was lost in 2012-13 through avoidance using
reliefs on donations. Tax avoidance involves using tax law to gain an advantage that
Parliament did not intend. It often involves contrived or artificial arrangements, such as
a circular flow of transactions. Individuals and companies may devise ways to avoid tax
specific to their own circumstances, or they may pay a fee to participate in a marketed
tax avoidance scheme.
2.8 Companies and individuals may try to avoid tax by donating to a charity that they
control. They can do this by circulating money through the charity so that the individual
or company retains the value of the donation, with limited benefit to charitable causes
(Figure 12). The charity may distribute some money to meet its charitable aims, but
the donor or a connected party receives a greater benefit. For example, HMRC is
investigating one charity that spent most of its income on fundraising events, which
involved the entertaining of the trustees’ friends and family; and another that loaned
more than £70 million to a number of companies connected to its trustee, with no
arrangements which commit the companies to repay the charity.
Figure 12
Donor controlled charities
Companies or individuals may try to exploit reliefs on donations where they control a charity
How a charity controlled by a company may be used to exploit Corporate Gift Aid
•
The management of the company and the charity overlap, or the company owners effectively control
the trustees.
•
The company donates profits to the charity and receives a reduction in its corporation tax bill through
Corporate Gift Aid.
•
The charity provides a loan to the donor company or to companies owned by the trustees.
The company does not repay the loan.
•
The charity may also distribute some money to causes fulfilling charitable obligations.
Example of a charity controlled by an individual and abuse of Higher Rate relief on Gift Aid
•
An individual has control over the management of a charity as a trustee or has influence over
the trustees.
•
The individual makes a donation to the charity and claims Higher Rate relief on the donation.
The charity also claims Gift Aid on the donation.
•
The individual receives benefit from their donation. This could be in the form of an interest free loan from
the charity. It may also be in the form of disguised non-charitable expenditure, such as entertaining,
or paying substantial salaries to family members.
•
The charity may distribute some money to causes fulfilling charitable obligations.
Source: National Audit Office analysis of HM Revenue & Customs information
28 Part Two Gift Aid and reliefs on donations
Marketed tax avoidance schemes
2.9 In total HMRC has identified eight marketed schemes that use reliefs on donations,
and three main designs by which these schemes operate, which are shown at Figure 13,
Figure 14 and Figure 15 on page 30. Figure 16 on page 31 shows the tax at risk across
these three main types of scheme. In general they work by either by extracting the value
of a donation and returning it to the donor, or by the true value of the donation being less
than is claimed in relief. HMRC does not believe any of these schemes are effective and is
challenging the claims made by their users.
Figure 13
Gift of shares: example of avoidance scheme
The charity receives shares that are in practice worthless
Promoter
1 Scheme user buys
£10,000 worth of shares
valued at 10p each
2 Promoter artificially
inflates the value of each
share to £1
Scheme user
3 User donates shares
to charity. Charities
cannot claim tax relief
on gift of shares
Charity
4 User claims relief on
full ‘value’ of donation
HMRC
The promoter inflates the price of shares significantly beyond their true value. The scheme user donates
these to a charity, but they may essentially be worthless. In some cases, charities have been unable to
realise any value from these gifts as the stock exchange suspended the trading of these shares.
Notes
1 The scheme user buys £10,000 worth of shares in a company that are valued at 10p each.
2
The promoter floats the company on a stock exchange, manipulating trading activity to inflate the value of each
share to £1.
3
The scheme user gifts their shares to a charity, stating a value of £100,000. In practice, the real value of the shares
is much lower.
4
The scheme user then claims relief from HMRC on the £100,000 donation to charity.
Source: National Audit Office analysis of HM Revenue & Customs information
Gift Aid and reliefs on donations Part Two 29
Figure 14
Gift of money: example of avoidance scheme
The charity is a complicit participant in a series of circular transactions
1 Charity sells gilts worth
£1,000,000 for £1,000
Charity
Third party
2 Third party sells gilts
on for £10,000
3 Scheme user sells gilts for £1,000,000
and donates proceeds to the charity
Scheme user
HMRC
5 Charity claims Gift Aid
on donation
4 Scheme user claims
Higher Rate Relief on donation
The promoter of the scheme controls the charity. There is a circular transaction of money involving the sale of
gilts and the donation of proceeds from the sale to charity.
Notes
1 The charity takes out a loan to purchase gilts worth £1,000,000 that it then sells to a third party for £1,000.
Gilts are not subject to capital gains tax.
2
The third party then sells the gilts on to the scheme user for £10,000.
3
The scheme user sells the gilts for the market value and donates the £1,000,000 to the charity with a Gift Aid declaration.
4
The scheme user claims Higher Rate relief between £250,000 and £312,500 on the £1,000,000 donation.
5
The charity uses the donation to repay the loan. It submits a claim to HMRC of £250,000 for Gift Aid relief.
Source: National Audit Office analysis of HM Revenue & Customs information
30 Part Two Gift Aid and reliefs on donations
Figure 15
Gift of gilts: example of avoidance scheme
The charity receives a fee for participating in the scheme
1 Scheme user given interest free loan of £100,000
Scheme user
2 Scheme user buys
and donates gilts
worth £100,000
Charity
3 Charity sells the
gilts at a fraction of
market value
Offshore trust
4 Claims relief
on donation
HMRC
The charity receives a fee for participating in the scheme. The users donate securities to the charity. The scheme extracts
the value of the donations from the charity.
Notes
1 The promoter provides a scheme user with an interest free loan through an offshore trust.
2
The user buys gilts that they then donate to the charity. Gilts are not subject to capital gains tax.
3
The charity receives a fee for participating in the scheme. It sells the gilts at a fraction of market value to the offshore trust,
which cancels the loan to the scheme user.
4
The scheme user claims relief on the value of the £100,000 donation.
Source: National Audit Office analysis of HM Revenue & Customs information
Error in Gift Aid
2.10HMRC estimates that £45 million was lost in 2012-13 through errors on Gift Aid
claims. Charities may make genuine mistakes in claiming Gift Aid relief. They may make
mistakes in their claim, submit duplicate claims or submit a claim on a donation where
the donor has not authorised the charity to claim Gift Aid. In 2012-13, charities contacted
and repaid HMRC £2.5 million in claims that they had mistakenly claimed. Donors may
also make mistakes. Some individuals who sign a Gift Aid declaration may not fully
understand that they have to pay sufficient income or capital gains tax in the year of
their donation for it to qualify for Gift Aid relief.
Gift Aid and reliefs on donations Part Two 31
Figure 16
Tax at risk across the three types of marketed avoidance schemes
There was £240 million tax at risk, although claims to the value of £23 million were withdrawn1
£ million
120
100
15.3
0.4
80
60
7.5
89.2
40
85.6
40.5
20
0
Gift of shares
Gift of money
Gift of gilts
Withdrawn claims
Claims
Note
1 Tax at risk as at September 2013. These figures relate to claims dating from 2004 onwards.
Source: National Audit Office analysis of HM Revenue & Customs data
HMRC’s response to the risks of abuse
2.11This section covers:
•
claiming Gift Aid and other tax reliefs;
•
how claims are processed; and
•
HMRC’s approach to tackling fraud, avoidance and error.
Claiming Gift Aid and other tax reliefs
2.12To access Gift Aid and other tax reliefs from HMRC, charities must first register,
if necessary, with the appropriate regulator in England and Wales, Scotland or
Northern Ireland. Charity regulators will consider if the organisation meets the legal
definition of a charity, which requires that it has a charitable purpose and provides public
benefit. They will also check that people named as trustees are eligible to act in that
capacity and have not, for example, been disqualified from acting as a company director.
32 Part Two Gift Aid and reliefs on donations
2.13Legislation introduced in 2010 created a new definition of a ‘charity for tax
purposes’. This helped deal with problems identified by HMRC’s internal audit, that there
was an over reliance on the Charity Commission to spot fictitious charities and that
HMRC was unable to effectively check the credibility of charities. Charity regulators do
not have access to tax data held by HMRC. Unless HMRC disclosed information to the
regulators through its statutory gateway, there was no mechanism by which to challenge
people known by HMRC to have participated in tax avoidance or evasion.
2.14Since April 2010, when the new legislation came into force, HMRC has been able
to apply a ‘fit and proper persons’ test to the managers of charities. The legislation
allows HMRC to refuse claims by charities for tax reliefs and exemptions where it has
concerns about the individuals involved. This allows HMRC to deny relief, for example,
where the trustees have participated in avoidance schemes or fraudulent activities.
2.15HMRC have identified around 200 cases in which they questioned if the managers
are ‘fit and proper’, refusing to recognise a charity for tax purposes or pay a Gift Aid
claim until the charities answer relevant questions. None of the charities concerned have
done so.
Processing claims
2.16HMRC’s charities team is responsible for risks relating to the tax affairs of charities.
HMRC receives around 150,000 Gift Aid claims a year from charities. Each claim may
cover hundreds or thousands of individual donations. HMRC also receives around
35,000 claims for Corporate Gift Aid from businesses. HMRC does not have a current
estimate of the number of individual taxpayers claiming Higher Rate relief on Gift Aid
donations. It last estimated this in 2002-03. Applying this analysis to current data, we
estimate the number is over 700,000.
2.17HMRC processes these claims in different parts of its business:
•
HMRC’s charities team process Gift Aid claims by charities.
•
HMRC’s Personal Tax business area is responsible for administering the taxes
paid by individuals, including reliefs on donations largely claimed through
self‑assessment tax returns.
•
The Business Tax area is responsible for processing businesses’ corporate tax
returns, in which Corporate Gift Aid may be claimed.
Gift Aid and reliefs on donations Part Two 33
2.18Where HMRC identifies concerns during processing it will examine the claims in
greater detail (Figure 17). For example a large donation, which may involve substantial
repayments of tax to a charity and reliefs claimed by an individual, may be reviewed by
the charities team and HMRC’s high net worth unit.
Figure 17
HMRC’s charities team is responsible for charity tax reliefs, although
high risk claims may also be examined by other areas of the business
Area of HMRC
Gift Aid relief
Higher Rate
relief
Corporate
Gift Aid
Gift of Shares
and Securities
Charities team








Large business service
Local compliance

High net worth unit


Affluent unit


Source: National Audit Office analysis of HM Revenue & Customs information
2.19HMRC’s charities team does not have oversight of or full information on all the
checks that happen in other parts of HMRC. Since 2010, it has established projects
to work with other areas of HMRC to improve its strategic management of the risks.
However, there remains no requirement for other areas to provide it with information
about relevant investigations or to identify the costs of or yields from interventions
relating to charity reliefs.
2.20Charity regulators may also hold information about charities, through their
own reviews and investigations, which could help HMRC’s assessment of claims.
Responding to the potential misuse of charitable status therefore requires a close
relationship between HMRC and the regulators of charities. Charity law and regulation
is a devolved matter in Scotland and Northern Ireland.
2.21HMRC’s charities team has a memorandum of understanding with the Charity
Commission to facilitate the sharing of information. Each has begun new investigations
as a result of information passed from the other, and has used new information to further
existing investigations.
34 Part Two Gift Aid and reliefs on donations
2.22However, neither the Charity Commission nor HMRC has shared all the information
they could have done as specified in the memorandum. This has hindered some of
both organisations’ investigations. The Charity Commission has not told HMRC about
all the statutory inquiries it has opened, and has not always communicated where it has
identified significant non-charitable activity, or passed enough information to HMRC to
indicate the full nature of its concern. Similarly, HMRC has not always passed indicators
of non‑charitable activity to the Charity Commission. HMRC has identified a small
number of cases where further information from the Charity Commission would have
saved them work in their fraud investigations or allowed them to address concerns
sooner. In some cases, the Charity Commission receives information from HMRC but
with constraints on its disclosure that mean the Charity Commission cannot use it in its
investigations. Some of this arose because HMRC were not sure how much information
it could share with the Charity Commission. It has now taken legal advice which
suggested it could share more information. After HMRC had taken legal advice, the
memorandum was revised in 2013 to widen the information shared.
2.23HMRC also has a memorandum of understanding with the Office of the Scottish
Charity Regulator and is looking to increase the exchange of information with this body.
The Charity Commission for Northern Ireland is currently testing its registration process
and plans to start registering charities from late 2013.
Strengthened countermeasures since 2009
2.24Between around 2007 and 2009, HMRC’s charities team placed greatest emphasis
on improving processing times for Gift Aid payments to charities. HMRC’s ability to
identify and tackle avoidance fraud and error at this time was weak. It operated a ‘pay
now, check later’ system, but it did not undertake sufficient checks. The checks that were
undertaken on claims and changes to a charity’s details were an insufficient deterrent to
fraudsters and resulted in some Gift Aid repayments being hijacked and redirected.
2.25HMRC recognised that a new approach was required. In 2009, it deployed new
staff on the charities team to be responsible for assessing risk and tackling fraud. It
introduced a strategy to tackle fraud in Gift Aid repayments and moved to a ‘check now,
pay later’ approach.
2.26HMRC also introduced new controls to strengthen its manual checks and tackle
areas of weakness, putting greater focus on the first point of contact with charities and
identifying high risk claims (Figure 18).
Gift Aid and reliefs on donations Part Two 35
Figure 18
Controls introduced by HMRC’s charities team to tackle risks since 2009
2009
2010
2011
2012
2012
2013
Measure
Risk, fraud and
compliance
teams
New application
form
Form to notify
HMRC of
change of
details
Repayment
security checks
Additional
administrative
checks
Charities online
Purpose
To risk assess
and investigate
claims for
fraud, error
and avoidance
Provides HMRC
with additional
information on
charities
Provides HMRC
with additional
information
it can check
against records
To identify
duplicate claims
or those which
contain errors
Various changes
to administrative
practices to
ensure greater
scrutiny and
cross-checking
of charity details.
These changes
help, for
example, prevent
fraudsters hijack
the details of a
charity
Inbuilt profiling of
claims which can
identify potential
fraud and error





Risks tackled
Avoidance

Fraud

Error



Point at which
risk is tackled
Application

Already in system

Source: National Audit Office analysis







36 Part Two Gift Aid and reliefs on donations
2.27In April 2013, HMRC launched a system to allow charities to claim Gift Aid online,
called Charities Online. HMRC introduced this to improve the service to charities, but
it has also helped HMRC to identify and stop fraud and error. The system checks data
to information held elsewhere in HMRC, allowing, for example, the identification of
mismatches to data already held by HMRC. It also allows for the automatic detection
of trustees identified by HMRC as not ‘fit and proper’.
Tackling fraud
2.28Since 2009, HMRC has developed its understanding of fraudulent Gift Aid claims
and behaviour. It has identified characteristics which may indicate fraud based on known
cases to profile unusual or suspicious Gift Aid claims. By its nature fraud can be difficult
to identify as fraudsters will attempt to disguise their claim or make it look like a genuine
claim. Until 2013, HMRC assessed the risks manually which could not easily identify
complex fraud or indicators of criminal attack. The system of online Gift Aid automatically
assesses claims for indicators of fraud.
2.29Amendments to the way in which HMRC provides reliefs, or extensions to them,
sometimes provide an opportunity for fraud or tax avoidance. HMRC has not always
identified these risks before legislation has been introduced. For example, government
withdrew a measure designed to encourage charitable giving because it judged the cost
of compliance work to counter fraudulent claims was greater than the benefits achieved.
Self-Assessment Donate allowed individuals who were due a repayment of tax to donate
this to a chosen charity. This was intended as a simplification of the rules, but in making
this change it introduced the risk of abuse. HMRC did not fully assess the potential risk
of abuse before the introduction of this measure, but having identified fraud it advised
government to withdraw it (Figure 19).
Figure 19
Timeline of Self-Assessment Donate
Year
Description
2005
Introduction of Self-Assessment Donate. HMRC did not fully assess the potential for abuse at
launch. There were no plans in place to formally assess the costs and benefits of the measure.
2009
Following investigation of a charity HMRC identified fraudulent use of the measure. Fraudsters
had set up a charity in advance of creating false repayments. They instructed HMRC through
Self-Assessment Donate to make the payment to the charity they controlled. One claim was for
around £200,000, a larger amount than all genuine donations made that year.
HMRC responded to the risk by checking all large claims.
HMRC identified a criminal attack, which they believe was intended to test its controls.
2010
HMRC assessed that if the measure were to continue it would have to undertake compliance
activities at a disproportionate cost to the benefits achieved through the measure.
2011
Government abolished the measure from the start of the 2012-13 tax year.
Source: National Audit Office analysis
Gift Aid and reliefs on donations Part Two 37
2.30HMRC now routinely assesses how it can counter potential fraud in the design of
new measures. The government introduced the Gift Aid Small Donations Scheme in
2013 to allow charities to claim Gift Aid on cash donations under £20, where donors
may not have the time to fill out a Gift Aid declaration form. In designing the rules, HMRC
assessed the risk of abuse using its knowledge of previous frauds. It concluded the rules
would deter fraudsters, without providing a disproportionate burden to genuine charities.
HMRC intends to review how the scheme is working in 2016.
Tackling avoidance
2.31When HMRC identifies tax avoidance, it challenges the taxpayer and where
necessary pursues the case through litigation. It may also advise government on changes
to tax law to prevent similar cases. Figure 20 outlines the key pieces of legislation that
government has introduced to tackle avoidance that exploits reliefs on donations.
Figure 20
Legislation introduced to tackle misuse of reliefs on donations
Year
Subject of legislation
Purpose of legislation
2004
Gift of Shares and Securities
Tackles avoidance schemes where the donor receives
substantial tax relief but no real value remains with the charity
(Figure 14). This legislation limits the value of tax relief of a
donation to the net benefit to the charity.
2006
Substantial donors
Limits tax relief on substantial donations where the donor also
has a controlling influence over the charity (Figure 13).
2010
Gift of Shares and Securities
Limits tax relief to the donor to the cost of acquiring the gift,
where the main purpose of acquisition was to gift it to charity
and claim tax relief (Figure 16).
2010
New definition of charity for
tax purposes, including fit
and proper test
Gives HMRC power to refuse claims for relief where the
managers of charities are not ‘fit and proper’ persons.
Introduced following a judgment in the European Court of
Justice. This judgment requires HMRC to allow tax reliefs for
charities in Europe, including Gift Aid relief on donations by
UK taxpayers.
2011
Tainted charity donations
Tackles abuse where donors obtain a financial advantage from
a charity in return for their donation (Figure 13). It replaces
2006 substantial donors legislation, which caught genuine
donations and created a disproportionate administration
burden for charities.
Source: National Audit Office analysis
38 Part Two Gift Aid and reliefs on donations
2.32HMRC has examined information on promoters and users of marketed avoidance
schemes. It considers the changes to legislation in 2004 and 2010 have prevented more
people using existing schemes and have deterred attempts to establish new schemes.
HMRC believe the change enacted in 2010, which took effect from December 2009,
stopped a scheme that was about to start. The promoter subsequently introduced a
different scheme which HMRC has assessed does not work and therefore does not
require a change to legislation.
Detecting avoidance
2.33It is difficult for HMRC to detect avoidance activities undertaken by single
individuals or companies that are not part of a marketed scheme. The arrangements
may appear to represent typical financial transactions. They may involve moderate sums
of money but over a long time period.
2.34Over the last few years HMRC has developed its understanding of unusual or high
risk behaviour. Gift Aid claim forms do not contain much information that HMRC can use in
the profiling of charities for avoidance activity. HMRC has since 2010, examined charity tax
returns to identify large debtors, unusual transactions and the ratio between expenditure
and income. This analysis could not be undertaken using Gift Aid claims alone.
2.35HMRC’s profiling has relied on partial information of its customer base, as it does
not currently hold key information on charities that would allow it to improve the focus of
its risk assessments. It does not, for example, have a record of the income, expenditure
and assets of charities. The Charity Commission holds some of this information and
shares this with HMRC, although not all of the information is up to date and it does not
cover all the charities HMRC works with. Assembling this information could, for example,
help HMRC identify unusual loan arrangements or other indicators of potential misuse.
2.36HMRC also assesses 7,000 to 10,000 charity tax returns a year, covering around
10 per cent of charities that have made recent Gift Aid claims. HMRC intends to increase
its coverage of charities over the next few years to improve the quantity and quality of
information it holds on customers. It has identified its largest customers which it will
continue to examine more closely.
2.37Understanding the customer base for reliefs on donations is important so that
HMRC can identify wider changes in behaviour. The value of Corporate Gift Aid relief
has increased significantly since government changed the relief so that companies could
use donations to reduce their corporation tax liability, from £107 million in 1999-2000
to around £400 million in 2012-13. HMRC’s data for 2012-13 is a rough estimate based
on corporate tax returns and produced on a different basis to figures from 1999-2000.
It does, however, suggest a significant growth in corporate giving, which does not
correspond with trends in corporate donations reported by the charity sector. This could
indicate a compliance risk. HMRC stopped reporting on Corporate Gift Aid in 2000 when
the relief changed.
Gift Aid and reliefs on donations Part Two 39
2.38HMRC also works with charities on the technical interpretation of their tax affairs.
These can cover a range of circumstances, including where there is genuine uncertainty
about the correct tax treatment to the omission of relevant information in returns to HMRC.
Marketed tax avoidance schemes
2.39HMRC’s specialist investigations and local compliance teams investigate the users
of marketed schemes. On becoming aware of a scheme HMRC is often reliant on the
scheme users’ tax returns – which it may receive 18 months later – before it can challenge
a scheme and begin a full investigation. It can sometimes take several years for HMRC to
collect evidence and explore legal arguments. HMRC will then litigate if necessary.
2.40There are 1,800 open cases of people using marketed avoidance schemes which
seek to exploit reliefs on donations. This is around 5 per cent of all marketed avoidance
cases that HMRC has under investigation, and accounts for around 2 per cent of the
value of all open cases.4 It will take HMRC many years to resolve its investigations of
the eight marketed schemes that use reliefs on donations. HMRC identified the earliest
scheme under investigation in 2004 and the latest in 2011. HMRC do not expect any of
the schemes to succeed when heard at tribunal.
2.41Even cases that HMRC believe are not technically complicated cannot necessarily
be resolved quickly. For one such scheme, HMRC are planning to resolve the cases,
either by convincing users to withdraw their claims or through litigation, within five years
of becoming aware of the scheme.
Tackling error
2.42HMRC identified £4 million in duplicate claims by charities, which it stopped prior to
payment or the charities returned when notified of the error. HMRC’s new online system
is able to identify and prevent duplicate payments. It also prevents arithmetical errors on
claims that were previously possible.
2.43HMRC undertakes checks that individuals have paid sufficient tax as part of their
routine checks on charity claims, but this is a manual process that only covers a small
part of the donor population. In late 2012, HMRC began an ongoing project to tackle this
specific area of risk.
4
We reported on HMRC’s approach to tackling marketed avoidance schemes in November 2012. Comptroller
and Auditor General, Tax Avoidance: tackling marketed avoidance schemes, Session 2012-13, HC 730,
National Audit Office, November 2012. We base the total number of open marketed avoidance cases on data from
this report as HMRC does not have a more recent estimate. HMRC intends to produce by the end of December 2013
a plan showing how it will manage and reduce the stock of open cases.
40 Part Two Gift Aid and reliefs on donations
HMRC’s performance in stopping losses
2.44HMRC has increased the yields it records from its checks on Gift Aid claims
by charities and its reviews of charity tax affairs. Figure 21 shows that since HMRC
adopted its new approach to tackling the risks, the yields have increased fourfold.
HMRC does not identify separately the potential losses it stops from individuals claiming
Higher Rate relief or companies claiming Corporate Gift Aid, so these are not included in
the recorded yields.
2.45The increase is a result not only of more resources, but also of an improved
focus on areas of risk. In 2009-10, HMRC estimates that of the staff on its charities
team undertaking checks, for every £1 in direct staff costs it saved £21 in tax revenue.
In 2012-13, this had risen to £44. This compares well to HMRC’s recent additional
investment in compliance work across the wider department which has provided
a marginal return of around 11:1.5
Figure 21
Yields from interventions
HMRC has increased the yields from its interventions
£ million
70
63
60
50
48
40
46
30
20
16
16
2008-09
2009-10
10
0
2010-11
2011-12
2012-13
Notes
1 Figures are adjusted for inflation to 2012-13. HMRC does not record separately the yields from reviewing the tax position
of individuals or companies which may result in identification of misuse of Higher Rate relief and Corporate Gift Aid.
2
Figures do not sum due to rounding.
Source: National Audit Office analysis of HM Revenue & Customs data
5
HL Committee of Public Accounts, HM Revenue and Customs; Compliance and Enforcement Programme,
Eighty‑Seventh Report of Session 2010–2012, HC 1892, May 2012.
Gift Aid and reliefs on donations Part Two 41
2.46Figure 22 shows our analysis of these yields by the categories of fraud, error
and avoidance. HMRC’s charities team does not itself routinely identify yields by
these categories.
2.47While staff numbers have increased, HMRC has not fully assessed if there are
adequate resources in place to tackle the identified risks. Between 2009 and 2012,
HMRC increased the number of staff involved in compliance activities in its charities
team from 50 to 95. In 2012-13, in addition to routine checks, HMRC undertook
risk‑based reviews including 300 fraud interventions and 100 compliance interventions.
HMRC also selects 400 charities a year for audit to ensure that they are using the Gift
Aid scheme properly and their claims are accurate.
2.48HMRC’s charities team are considering revising its staffing model to increase the
number of hours the staff tackling avoidance have to undertake investigations. This work
requires experienced and skilled compliance staff. Changes would involve additional
staff undertaking preliminary risk assessments. We modelled the potential impact of
these changes and estimate HMRC could achieve around a 20 per cent increase in
avoidance yields.
Figure 22
Yields by category of risk, 2012-13
Yields were £63 million, of which the majority came from tackling fraud and error1
£ million
35
30
31
25
20
15
17
15
10
5
0
Avoidance
Error
Fraud
Note
1 There are additional yields that HMRC do not currently record in a way that it can reliably attribute to Higher Rate relief
and Corporate Gift Aid. The yields include losses from charities incorrectly stating their tax position, for example where
there is a donor controlled charity. HMRC does not routinely identify whether its yield comes from ‘avoidance’, ‘error’ or
‘fraud’. The split is based on National Audit Office analysis of their recorded figures.
Source: National Audit Office analysis of HM Revenue & Customs data
42 Appendix One Gift Aid and reliefs on donations
Appendix One
Our audit approach
1 In this study we examined how HMRC monitors and evaluates the effectiveness
of reliefs on donations, and how it addresses tax avoidance, fraud and error relating to
these reliefs. We examined:
•
Whether HM Treasury and HMRC established clear measures to assess
performance and how the effectiveness of the reliefs have been evaluated.
•
If HMRC has a good understanding of the risks that individuals or charities use the
reliefs in ways Parliament did not intend, and identifies the scale of the problem.
•
If HMRC has developed an effective response to mitigating these risks.
2 We applied an evaluative framework to assess HMRC’s understanding of the risks
and the outcomes of HMRC’s activities to reduce fraud, error and tax avoidance.
3 Our audit approach is summarised in Figure 23. Our evidence base is described in
Appendix Two.
Gift Aid and reliefs on donations Appendix One 43
Figure 23
Our audit approach
The Department’s
objective
How this will
be achieved
Our study
Our evaluative
criteria
Our evidence
(see Appendix Two
for details)
HMRC administers reliefs on donations, which are intended to support charities and encourage giving. HMRC has a
strategic objective to improve the extent to which individuals and businesses pay the tax due and receive the credits
and payments to which they are entitled.
HMRC and HM Treasury are responsible for monitoring the effectiveness of reliefs on donations. HMRC processes
the claims for the reliefs and is responsible for putting measures in place to identify potential avoidance, fraud or error.
The study examined how HMRC tackles the risks of Gift Aid and reliefs on donations and how HMRC and
HM Treasury monitored the effectiveness of these reliefs.
There are clear measures to assess
performance. The reliefs have
been monitored and evaluated.
HMRC has a good understanding
of the risks and the scale of the
problem.
HMRC has an effective response
to mitigating these risks.
We assessed this by:
We assessed this by:
We assessed this by:
•
analysing published
statistics and data;
•
•
•
reviewing HMRC papers
and published research;
analysing HMRC
management information,
including tax at risk and its
estimate of losses;
reviewing case examples
of specific cases of fraud and
avoidance;
•
speaking with operational
staff to review and map
processes for identifying
potential risks; and
•
analysing HMRC’s
management information
of its compliance activities;
•
examining HMRC’s
information of marketed
avoidance schemes;
•
reviewing HMRC’s
controls to prevent
potential abuses; and
•
examining legislation
introduced to tackle
avoidance.
•
•
Our conclusions
interviewing relevant
staff within HMRC and
HM Treasury; and
examining charity tax
law legislation.
•
reviewing case files and
management information
to establish how HMRC
identified specific cases of
fraud and avoidance.
Gift Aid provides an important source of income for many charities. However, there is insufficient evidence that
government actively encourages take-up of these reliefs. The effectiveness of changes made in 2000 to increase
charitable giving is not proven. HMRC has improved its response to the risks of fraud, avoidance and error, but
lacks a robust estimate of tax lost.
44 Appendix Two Gift Aid and reliefs on donations
Appendix Two
Our evidence base
1 Our conclusions were reached following analysis of evidence collected between
July and September 2013.
2 We assessed whether HMRC and HM Treasury established clear
performance measures to assess and monitor the effectiveness of reliefs.
We examined if the reliefs have been evaluated.
•
We analysed HMRC’s published statistics on charity tax reliefs. We examined
survey data collected by the Office for National Statistics, as well as data reported
by bodies from the charitable sector, such as the National Council for Voluntary
Organisations. We express the value of reliefs over time in real terms to remove the
effect of inflation. We used HM Treasury’s deflators published 30 September 2013.
•
We reviewed HMRC documents and published research about charity reliefs,
including government consultation papers. Documentation relating to the original
design of the reliefs were not available for review.
•
We interviewed relevant staff within HMRC and HM Treasury. This included staff
responsible for designing changes to these reliefs. We spoke to wider stakeholders,
including representatives from the charitable sector and academics.
•
We examined how charity tax law has changed from reviewing legislation since
the introduction of Gift Aid in 1990.
3 We assessed if HMRC has a good understanding of the risks that individuals
or charities use the reliefs in ways Parliament did not intend, and identifies the
scale of the problem. We:
•
analysed HMRC management information, including tax at risk from eight
marketed avoidance schemes and its working estimate of losses from avoidance
activities, fraud and error. We tested the reasonableness of the estimate;
•
spoke with operational staff to review and map processes for identifying
potential risks; and
•
reviewed case files and management information to establish how HMRC
identified specific cases of fraud and avoidance.
Gift Aid and reliefs on donations Appendix Two 45
4 We assessed if HMRC has developed an effective response to mitigating
these risks. We:
•
reviewed case files to determine how HMRC tackled fraud and avoidance, the
approaches it applied and money recovered;
•
analysed HMRC’s management information and data to assess its
performance over time in tackling these risks. We undertook detailed analysis to
align compliance activities to the risks of fraud, error and avoidance and examined
progress against each of these categories;
•
examined HMRC’s identification of the number of users involved in eight marketed
avoidance schemes. We reviewed case files of marketed avoidance schemes and
the approaches applied by HMRC;
•
reviewed HMRC’s controls to assess how they prevent risks of fraud, error and
avoidance. We interviewed those staff responsible for undertaking compliance
activities and examined how the impact of this work is monitored; and
•
examined how HMRC has recommended changes to tax law to prevent
avoidance. We reviewed specific case examples where government introduced
new legislation.
46 Appendix Three Gift Aid and reliefs on donations
Appendix Three
Assessment of Gift Aid and reliefs on donations
1 In Figure 4 we outlined the characteristics of a well-designed, administered
and evaluated tax relief. Figure 24 outlines our assessment of Gift Aid and reliefs
on donations, such as Higher Rate relief, Corporate Gift Aid and Gifts of Shares and
Securities against these criteria.
Figure 24
Assessment of Gift Aid and reliefs on donations
Tax relief cycle
What good looks like
Assessment
Design
There is an adequate
evidence base available
to support decisions
over design.
Evidence of costs and benefits established at design
were not available for our review.
The objectives and
intended outcomes are
clear and, where relevant,
performance targets are set
to reflect these.
Option appraisal was
undertaken.
Administration
and monitoring
Process for delivering the
relief is managed.
Where performance targets
are in place, these are
monitored, reported and
acted upon.
Evaluation and
feedback
The relief is evaluated at
appropriate intervals.
Feedback from evaluation
informs future management
of relief and informs
knowledge base to support
decisions over the design
of future tax reliefs.
Source: National Audit Office analysis
The broad objectives were stated. The intended
outcomes and the overall distribution of benefits
across the charity sector, individuals and companies
are not clear.
No performance measures were established when
significant changes were made to the design of reliefs.
Data required to evaluate changes to the design of
reliefs were not collected.
HMRC did not fully understand and tackle risks of
abuse until after 2009. Prior to this HMRC was focused
on speed of processing Gift Aid claims from charities.
HMRC has not fully evaluated if the level of staffing
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